Stay informed with free updates
Simply sign up for the myFT Digest of China Economy, delivered straight to your inbox.
Chinese authorities have announced their biggest fiscal package in recent years, the latest effort to boost economic growth as they battle trade tensions and the threat of sweeping tariffs from President Donald Trump.
The long-awaited 10 trillion yuan ($1.4 trillion) plan, which followed September’s monetary policy package, focused on eliminating billions of dollars in local government debt that has been a drag on growth. But it fell short of supporting household spending and addressing the downturn in the real estate sector, as some investors had hoped.
The Hong Kong-listed Hang Seng Chinese Enterprises Index fell 1.4% on Monday.
Many experts are wondering whether Beijing’s efforts will be enough to give the world’s second-largest economy a decisive boost, especially if higher tariffs are imposed on Chinese exports after President Trump takes office next year. has doubts about whether the policy will resolve local government debt.
What is the latest stimulus package?
China’s Finance Minister Lan Buan on Friday announced a radical plan to restructure local governments’ “hidden” debt. Much of the debt is held through off-balance sheet financial instruments used by local governments to finance infrastructure projects.
Under the program, local governments will be authorized to issue RMB 6 trillion in new bonds over three years and reallocate RMB 4 trillion from previously announced bonds over the next five years.
Lunn said officials were “considering” additional measures to recapitalize large banks, buy unfinished real estate and boost consumption.
Why did this policy focus on local government debt?
Local governments are one of the engines of China’s economy, and the central government’s reluctance to take on debt makes them important providers of capital investment for regional growth.
In many regions, authorities have turned to local government financial institutions (LGFVs) to finance investments in areas such as real estate, infrastructure, technology and financial assets.
However, many of these investments are high-risk and low-return, as in Guizhou province, which has rushed to build bridges. As the long-standing slowdown in China’s real estate sector deepened, the LGFV debt burden became unsustainable, hurting government finances and inhibiting growth.
Meanwhile, local governments are forced to impose fines and additional taxes on private businesses, hurting investor confidence.
How does debt restructuring work?
Debt restructuring programs allow municipalities to bring these hidden LGFV debts onto their balance sheets and convert them into longer-maturity, lower-interest debt.
The debt reallocation is expected to save RMB600 billion in interest payments over five years.
The debt exchange, combined with other local government debt repayment plans, will reduce LGFV’s hidden debt pile to about 2 trillion yuan by 2028, according to the Ministry of Finance.
Is that enough?
In a sign of uncertainty surrounding off-balance sheet debt, independent analysts estimate that LGFV’s debt could reach RMB60 trillion, far higher than Lan’s estimate of around RMB14 trillion. Exceeds.
Ren Tao, a senior researcher at the Shanghai Financial Development Institute, said local governments will also continue to be greatly affected as the central government will not bear any of the repayment burden. “We expect hidden debt pressures to continue to be a challenge in some states,” he said.
The IMF warned last year that a third of LGFVs had become “commercially unviable” and had generated insufficient income to cover interest payments over the past three years. He called for further debt restructuring, including “writing down and selling assets using the bankruptcy framework.”
“Beijing needs to introduce fiscal reforms to discipline local government borrowing and impose tighter budget constraints,” said Ting Lu, Nomura’s chief China economist.
Why didn’t the Chinese government provide more direct stimulus?
The Chinese government claims that restoring the health of local governments will lay the foundations for healthy future growth.
But analysts say a debt swap would add little spending to the economy and would not be a stimulus. Investors had hoped that policymakers would step up debt resolution plans by buying up some of China’s millions of unsold homes or providing direct support to households.
Recommended
“The lack of growth-enhancing measures, particularly consumer stimulus, was disappointing,” Citi analysts said in a note.
Many economists believe Beijing is saving fiscal “dry powder” for when President Trump’s tariff plans become more clear.
“It’s difficult to come up with measures to cushion the economy before we know what the impact of tariffs will be,” said Jacqueline Long, China economist at BNP Paribas. “Any expansion policy will have to wait and see.”
